Show objections against profit maximization, Financial Management

Assignment Help:

Q. Show objections against profit maximization?

1) Profit cannot be ascertained well in advance to express the. Probability of return as future is Uncertain. It is not at all possible to maximize what cannot be known. Moreover, the term profit is vague and has not been explained clearly what it means. It may be total profit before tax or after tax or profitability rate. Profitability rate, again is ambiguous as it may be in relation to capital employed, share capital, owner's funds. Or sales. This vagueness is not present in wealth maximization goal as the concept of wealth is very clear. It represents value of benefits minus the cost of investment.

2) The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt further to maximize. It is argued that firm's goal cannot be to maximize profits but to attain a certain level or rate of profit holding certain share of the market or certain level of sales. Firms should try to 'satisfy' rather than to 'maximize'.

3) There must be a balance between expected return and risk. The possibility of higher expected yields are associated with greater risk to recognize such a balance and wealth maximization is brought into the analysis. In such cases, higher capitalization rate involves. Such combination of Financial Management expected returns with risk variations and related capitalization rate cannot be considered in the concept of profit maximization.

4) The goal of maximization of profits is considered to be a narrow outlook. Evidently when profit. Maximization becomes the basis of financial decisions of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand.

5) The criterion of profit maximization ignores time value factor. It considers the total benefits or profits into account while considering a project whereas the length of time in earning that profit is not considered at all, whereas the wealth maximization concept fully endorses the time value factor in evaluating cash flows. Keeping the goals of financial management in view, most of the thinkers on the subject have come to the conclusion that the aim of an enterprise should be wealth maximization and not the profit maximization. Professor Soloman of Stanford University has handled the issue very logically. He argues that it is useful to make a distinction between profit and 'profitability'. Maximization of profits with a view to maximizing the wealth of shareholders is clearly an unreal motive. On the other hand, profitability maximization with a view to using resources to yield economic values higher than the joint values of inputs required is a usefl.JJ goal. Thus, the proper goal of financial management is wealth maximization.


Related Discussions:- Show objections against profit maximization

Wcr expense ratios, Scenario:  ABC Company sells widgets in three varietie...

Scenario:  ABC Company sells widgets in three varieties (blue, red, and yellow) but has lost money for the past three years.  Competitive intelligence shows the Company's products

Evaluate consolidated income statement, The consolidated income statement...

The consolidated income statement for AB Group for the year ended 30 June 2010: (all amounts in the workings are in $000, unless stated otherwise)

Conversion parity price, We defined the conversion premium as the dif...

We defined the conversion premium as the difference between the market price of the convertible and the conversion value. The conversion premium ratio tells us ab

Domestic factors were important than international factor, Why do you think...

Why do you think the empirical studies as regards factors influencing equity returns mainly showed that domestic factors were more significant than international factors, and, seco

State the term- dividend cover, Dividend cover Dividend cover = Profit ...

Dividend cover Dividend cover = Profit available to ordinary shareholders (PAT) / Annual dividend(no. of times) Or =    EPS/Dividend per share Dividend cover shows safety

Explain discounting or present value concept, Q. Explain Discounting or Pre...

Q. Explain Discounting or Present Value Concept? Discounting or Present Value Concept: - According to this concept rupee one of today is more valuable than rupee one a year lat

Define a currency futures contract, Q. Define a currency futures contract? ...

Q. Define a currency futures contract? A currency futures contract is a standardised contract for the buying or else selling of a specified quantity of currency. It is traded o

Serene Hall ?? Assignment, The purchase price is expected to be in the regi...

The purchase price is expected to be in the region of £30m - £40m now (year 0 ?? 2003) and further cash flow effects might include: ?? Annual cash inflows from New You ?? in a rang

Capital gain on investment, a. Why do prices of low coupon bonds tend to fl...

a. Why do prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds? And why do prices of longer te$ to maturity bonds tend to fluctuate more than th

Evaluate the extent to which the balanced scorecard, Evaluate the extent to...

Evaluate the extent to which the Balanced Scorecard: The Balanced Scorecard has been described as an effective measurement system which enables managers of an organisation to

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd